How much do you put in your pension?

[Acme Thunderer]

I have a number of things on the go

I have a couple of permie final salary schemes that will give me about 13K pa in today's Money.
Currently making employer contributions of about £700 pm into a pension scheme. It's not a SIPP, but something my IFA organised - need to get my head round SIPP as the fees I'm paying are not worth the returns.
Pay £200 pm into a S&S ISA - would pay more but have kids at Uni so acting as the BOMAD
Overpaying mortgage to get that paid off sooner

Not the most exciting or fastest growing, but I'm comfortable with it, which is what counts

[WordIsBond]

Kudos, you know a lot more than me on the pension side. I wish I had learned more and invested at least something reasonable into pensions when I was younger, but now in my mid 40s I don't see it as worthwhile. If I was 25, I would certainly put a decent sum into a pension each month, but only after living a lot and then investing some in property.

Wow, I think you really need to re-think this.

The younger you are, the more the investment over a longer period of time pays off. But the older you are, the more the tax benefits pay off.

If YourCo makes a £10K contribution next month, it costs you £7.4K of take home (after corp tax and dividend tax, only £5.4K if you are into higher rate dividend tax). If you retire the next day, that's £2.5K tax free. So now you have a pot of £7.5K that cost you a net £4.9K (or 2.9K), the income of which will likely be taxed at the basic rate. Sounds like a good deal to me, even if you are old and so don't get much benefit from the tax deferred investment income over time. As you near retirement, pension is the most tax efficient way to get money out of YourCo, even more efficient than basic rate dividends, and far more efficient than higher rate dividends. If you are already taking the max dividend in the basic rate band and your profit exceeds that, this is absolutely a no-brainer, unless you still need to build up a reserve / war-chest, or actually need the money right now.

[SimonMac]

Short answer is as much as you can.

Long answer as a rule of thumb is half your age as a % of your salary, I go on a £40k a year salary, I am 34 so that should be £6800 a year.

I have a good pension pot already, started when I was 16 with a local government job, transferred that to a civil service pension and then transferred that into a SIPP when I started contracting.

[SimonMac]

One thing to note, all those saying "55" are you aware this is changing to 57 in 2028

[SueEllen]

One thing to note, all those saying "55" are you aware this is changing to 57 in 2028

It may actually change before that as they are doing the pension review now as they need increase the state pension age faster.

Regardless it will be 10 years before your state pension date.

[seanraaron]

I've got a couple of piss-poor permie pensions I'll likely cash out day-one (if that tulip's still allowed then). Until the contracting thing is well established I'm doing nothing; once I have a war chest built up, I'll start putting some cash in a shoebox in the cupboard for my tea and biscuits when I'm a toothless old goat.

[ChimpMaster]

Wow, I think you really need to re-think this.

The younger you are, the more the investment over a longer period of time pays off. But the older you are, the more the tax benefits pay off.

If YourCo makes a £10K contribution next month, it costs you £7.4K of take home (after corp tax and dividend tax, only £5.4K if you are into higher rate dividend tax). If you retire the next day, that's £2.5K tax free. So now you have a pot of £7.5K that cost you a net £4.9K (or 2.9K), the income of which will likely be taxed at the basic rate. Sounds like a good deal to me, even if you are old and so don't get much benefit from the tax deferred investment income over time. As you near retirement, pension is the most tax efficient way to get money out of YourCo, even more efficient than basic rate dividends, and far more efficient than higher rate dividends. If you are already taking the max dividend in the basic rate band and your profit exceeds that, this is absolutely a no-brainer, unless you still need to build up a reserve / war-chest, or actually need the money right now.

It's true, I don't understand this. I don't even understand your example above, and so perhaps this is another reason why I avoid pensions. I thought 10k contribution from the Ltd Co would save 20% CT and then you would get a top up from the taxman into the pension, or something like that.

What I do understand is that I extract salary/divs only up to the 40% tax threshold from my Ltd Co - or actually I extract less now because my property income makes up a few £k of my income. So I leave the bulk of profit in the company, which I will then take out when I quit contracting in a year or so (not long). Then, assuming MVL/ER rules don't change drastically, I will extract with 10% CGT and invest more in property and/or other income generating assets.

So in my mind, I can invest most of the Ltd Co profit when I MVL in a couple of years. Why would I instead throw any into a pension that'll be locked up until I'm 57 or more?

I could well be missing a trick here though. I've often thought of throwing £100k or so into a pension (including previous years' allowances) but can't see the benefit.

[I just need to test it]

I've got a couple of piss-poor permie pensions I'll likely cash out day-one (if that tulip's still allowed then). Until the contracting thing is well established I'm doing nothing; once I have a war chest built up, I'll start putting some cash in a shoebox in the cupboard for my tea and biscuits when I'm a toothless old goat.

The first time I looked seriously at my permie pension statements (admittedly accumulated over only a few short years) I LOLed at the laughably low monthly payment I would receive at retirement.

Only to then realise that was the annual payment.

[seanraaron]

The first time I looked seriously at my permie pension statements (admittedly accumulated over only a few short years) I LOLed at the laughably low monthly payment I would receive at retirement.

Only to then realise that was the annual payment.

Yeah they're like a couple of grand each, but then I only choose the cash option when I get these company pension things.

Not quite as laughable as my Social Security statements from the States where I barely worked enough to qualify for any state pension. Think it works out to around $120/mo. Hardly worth it given I'll need to change it into euros.

[WordIsBond]

It's true, I don't understand this. I don't even understand your example above, and so perhaps this is another reason why I avoid pensions. I thought 10k contribution from the Ltd Co would save 20% CT and then you would get a top up from the taxman into the pension, or something like that.

What I do understand is that I extract salary/divs only up to the 40% tax threshold from my Ltd Co - or actually I extract less now because my property income makes up a few £k of my income. So I leave the bulk of profit in the company, which I will then take out when I quit contracting in a year or so (not long). Then, assuming MVL/ER rules don't change drastically, I will extract with 10% CGT and invest more in property and/or other income generating assets.

So in my mind, I can invest most of the Ltd Co profit when I MVL in a couple of years. Why would I instead throw any into a pension that'll be locked up until I'm 57 or more?

I could well be missing a trick here though. I've often thought of throwing £100k or so into a pension (including previous years' allowances) but can't see the benefit.

It's not hard to figure out, and avoiding learning about something you don't understand is probably not the smartest thing in the world.

Let's assume we're talking only about money that would be higher rate band if you took it now. For purposes of discussion, let's assume you are making £10K every year you can either keep in the company or add to a pension.

Your plan:
1. Pay 20% CT right now. YourCo now has 8K of the original £10K.
2. Hope that MVL is still available when you quit. If it is, you take out the 8K and pay 10% of it. You know have £7.2K and Hector has 2.8K.
3. If MVL isn't available because the rules change, you'll probably take out your remaining 8K as dividends. If you have other income pushing you into higher rate band, you pay Hector another 2.6K out of your 8K, leaving you 5.4K. If you don't have that other income, you pay another 0.6K, leaving you 7.4K of your original 10K.
4. You have control of the money and invest it. Taxes will only be due, from that time forward, on any investment income which is not in ISAs.
5. You can invest in BTL, if you want and they haven't destroyed the BTL investment opportunity.

Pension approach:
1. Pay all £10K into your pension. There's no tax.
2. Invest it in pretty much anything you want except BTL.
3. At retirement, take 25% of the original £10K AND 25% of any investment proceeds over the years, tax free.
4. With the rest, buy an annuity or use drawdown. It will be taxed at your tax rate in retirement, which is much less likely to be higher rate band than now. If you put your non-pension investments now into ISAs, much of your annuity / drawdown will also be tax free due to the personal allowance.

You asked this:

Why would I instead throw any into a pension that'll be locked up until I'm 57 or more?

If you don't need the money now and don't anticipate needing it until retirement, why not lock it up if it gives you a huge tax advantage to do so?

This is really a big deal, there is a reason everyone went into a panic when it sounded like the Chancer was going to mess up the system. If you can't see the benefit, then you are being foolish not to find out what the benefit is. Suppose I'm walking down the street, and someone tells me, "There's a thousand quid in that brown envelope on the ground over there, and you can have it if you want." I could say, "I can't see the benefit," and keep walking, or I could ask, "Why are you giving away money?" and try to understand the benefit and the risks, and make an informed decision. If you can't see the benefit, you aren't making an informed decision, because they are offering free money.

They aren't giving you that money to try and trap you, like the guy on the street with the brown envelope probably is. They are doing it because they want you to remain a spender and a taxpayer in retirement, rather than live on benefits and be unable to contribute to the economy. So understand the risks (money tied up for years, political risks) vs the benefits vs the risks (including political) of the alternative approaches, and then make your informed decision.

To me, it's a no-brainer but the lifetime limit will stop me soon, unfortunately. And that was stupid, because with interest rates so low, that lifetime limit isn't going to buy all that much retirement income.